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During each economic downturn, many business start to feel the need to trim their workforce because they believe it will help their bottom line. Whether it’s a big corporation like Pepsico announcing a few days ago that it will cut 3,300 jobs from their work force or a small pet shop down the corner firing all their temporary staff, management believes that doing so will actually help them retain more money. To them I say, “stop laying off your people! You aren’t helping anyone, not even yourself”!
Redemption, Redemption, Redemption = Selling, Selling and More Selling
The conventional thinking is that laying off unneeded workers directly help the bottom line. While this is absolutely true, the indirect effects are disastrous!
401ks
If we consider that 45% of people cash out their 401ks when they leave their job, layoff means many people wanting to redeem their 401k money. This translates to selling mutual funds, creating the need for mutual fund managers to sell stocks to generate the cash needed.
Need for Cash
Without a steady income stream, people will need to start using their savings. While some of us keep our emergency funds in high yield savings accounts, there are many people that actually put all that money into the stock market. This causes more sell off.
Confidence
Then of course there’s confidence. If people we know start to lose their job, we are going to feel insecure about ours. Losing confidence means being more conservative (more savings, less investing).
Why Should Businesses Care about the Stock Market?
In a falling market where everyone is just selling stocks, it affects businesses whether it is a big corporation or a small business. So stop just thinking about what’s in front of you and think longer term!
Corporations Need Cash Too
One common way for a public company to raise cash is to offer more stocks. While this creates more shares and will generally decrease share prices, it is much less severe in a rising market. When General Electric (GE) needed money recently, they thought that issuing shares alone will drive the stock price so low that they gave Warren Buffet 10% a year in interest for his $5 billion investment before their secondary stock offering. With that $500 million a year in interests, GE could just keep those workers they fired who no doubt sold so many of GE shares!
We Care About the Market Even if Our Company Does Not
Do you noticed that there are more tension in the work place lately? Have you seen the stock market crash these days? While we know it’s mostly paper money, it’s no coincidence that we feel upset and frustrated when the stock market go down. Unfortunately, I’ve seen much of this frustration being carried to our office and into meetings too! Is this the perfect environment for everyone to work in?
Is This a Stretch?
To the neh sayers that think this is exaggerating the effects of layoffs, consider that sometimes smaller effects snowball into much bigger problems. If people around you are selling stocks, wouldn’t you want to sell too? If you sell, wouldn’t people around you sell? When everyone sells, isn’t it exactly what is happening right now?
Stop those layoffs, because it will benefit you too.
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You are 100% correct. If companies could just keep poeple on the payrolls, this would sort itself out. Thanks so much for the post!
Cute post
I don’t think we can ever tell how much laying people off is hurting stocks but there is no doubt that it’s not helping!!
It’s nay sayers my friend
Add to your reasons the following…
If companies keep laying people off, they shrink the customer pool of potential buyers of their own products! This may not be so true of thing like soap and jeans, but it is very true of large purchases like major appliances and cars.
True, the layoffs are short-sighted and ill-advised. They don’t lead to anything of worth in the long run, and it doesn’t help the economy to have unemployed people out there (suddenly without health insurance, no less…)
Finally… isn’t “naysayers” one word?
Jerry
Holy crap! I never knew 45% of workers cash out their 401(k)s when leaving a job. My shock over that aside, great post.
My company just axed 10% of its workforce yesterday. I think you may be onto something; but the problem I see is that companies sometimes lay people off for short term benefits. It’s about how do we stay profitable THIS YEAR? How do we make our debt payments NEXT MONTH?
They’re not looking at the long-term economic picture–they’re not even looking at their own company’s long-term picture.
When the market falls, not all of us are upset and frustrated. I personally feel it was something that needed to happen for the long term good. Kind of like disciplining your child so that he/she will learn from the mistake and grow on to better things. As long as I let-it-ride, my money will still be there when the market recovers. I actually bought more, not sold.
It’s a time tho when I am grateful to be working for a locally owned non-union family business. There may be hours adjusted, but no one will be losing health insurance by being laid off. They are truly caring about the families that their employees are supporting and see the need to keep everyone working as much as possible. They know when the upturn comes, they will need their people back full time and overtime, so they are willing to ride it out.
They are actually encouraging me to go back to 40 hrs instead of the 33 I work now…. not gonna happen in my world as I want the time off with my grandkids, but nice to know it is there if I needed it.
This article is too stupid for me not to respond.
You obviously don’t run a business. When you have excess capacity and you don’t anticipate any turn around anytime soon, layoffs are the logical and efficient thing to do. If you don’t have layoffs, people would just sit around doing nothing while collecting money. It’s better for them to find another job where they’ll be more productive. To do otherwise is socialism.
When people leave their jobs, they don’t cash out their 401Ks. Doing so would incur 10% penalty plus taxes. They generally leave it where it is (they usually allowed some amount of time) or roll it over to another 401K or IRA plan. Of course, if they can demonstrate financial hardship, they can withdraw without penalty.
Nauy makes some good points but you shouldn’t be so dismissive of the point of the post. It’s amazing how at large companies, an executive gets millions of dollars in bonuses and then turns around and tells employees that times are tough and that some must be laid off. If that person was a true leader, she/he would give up that bonus to retain jobs. And there are always things that can be done when times are slow, like training/maintenance for blue collar workers or training/R&D/process improvements for white collar ones.
And another major argument against lay-offs are the fact that when people are let go, companies lose hard to replace people with skills and knowledge that may go to competitors. When business picks up, it costs a lot of money to recruit, hire, and train new people.
Lay-offs are often short sighted band-aids to increase shareholder returns and executive bonuses. Sometimes they are necessary, but corporations are way too quick to use them. Leaders often forget my earlier point that employees make great customers. Laid-off people can’t afford to be anybody’s customers.
Atul
http://www.thingsivenoticed.com